In our last blog, we looked at the basic steps
that small businesses can take when it comes to minimising the risks of getting paid late, how to chase up late payments and how to escalate the issue if a customer is persisting in not paying.
A recent survey found that three-quarters of SME owners say that they have cashflow issues as a result of overdue invoices and 8 per cent have been unable to make necessary investments in their business due to a lack of working capital. However, with one fifth saying that chasing money owed had damaged customer relationships, getting the balance right has never been more vital.
In part two, we’ll examine some more aspects relating to the issue, such as how to manage tone of voice when chasing late payments, checks that can be carried out on late-paying customers and legal options that are available in the event that a customer is still refusing to pay.
Getting your tone right
With late payments such a widespread issue among SMEs, it is likely that many small businesses will struggle to make payments as a result of being owed money by their own customers. It is important to remember when chasing late payments that not all overdue invoices are as a result of carelessness or a calculated effort to not pay, but are often due to businesses struggling with a lack of working capital.
While it is, of course, necessary to chase late payments, in order to not risk damaging a valuable relationship with a customer, it is vital to approach correspondence with a respectful tone that acknowledges the stresses many owners are under and seeks a constructive solution that will enable the working relationship to remain strong.
Early communications should remain friendly, seeking to establish if there is a reason why payment is late and if there is anything that can be done on the creditors side to facilitate a quicker payment. At this stage, it’s best to keep communication relaxed, perhaps via email to begin with, and then follow this up a few days later with a friendly phone call.
If payment is still not being made then later communications should adopt an increasingly formal tone, at first outlining implications such as late payment fees or backdated interest and later, if the issue is still not resolved, outlining possible legal recourse and potentially involving a solicitor in the conversation.
Of course, even if payment is still not being made after all this, it is important that communications remain respectful and professional and that owners don’t allow their natural frustration to turn into unpleasantness or aggression.
Checks and due diligence
If an owner becomes worried about a customer and late payments – perhaps if the issue occurs multiple times – then there are checks that can be carried out to gauge whether it is part of a deeper pattern or maybe just a more isolated trend resulting from the current economic uncertainty.
Firstly, in the event that the customer is a large company – one that fits at least two of the following criteria: £36 million turnover; £18 million on balance sheet; 250 employees – then they will be obliged to publish reports twice a year which can be downloaded from gov.uk. These reports show the average time it takes them to pay suppliers, as well as the proportion of payments that it does not pay on time.
With smaller businesses that are not obliged to publish these results, records can be checked in a number of other ways. Owners could subscribe to a credit agency to check for any bad debts at the customers business or search court records for instances where the customer has been sued or fined for not paying others.
Finally, if late payments lead to concerns that a customer is in trouble (which could lead to a situation in which creditors lose out on money owed to them), then owners can search the company’s profile in the Gazette to see if insolvency action has been taken.
If any of these checks reveal a history or pattern of late payments, then this may change how an owner deals with the customer. They may choose to escalate more quickly when chasing late payments, or even decide that the relationship is not worth persisting with due to the customer’s unreliability and the risks that it poses
Unfortunately, there are instances where owners will be required to take legal action in order to get the money they are rightfully owed. Once all formal options have been exhausted, a solicitor’s warning letter should be sent to the customer. This letter should be sent via signed-for-delivery, which will provide proof that it has been received, and should inform the customer of the legal steps that are due to be taken.
This is the final warning. If payment is still not forthcoming, then debt recovery action will be required and a third party may need to be involved. Small businesses typically have three avenues of legal recourse when looking to recover debt: mediation, a statutory demand or court action.
A statutory demand essentially gives a debtor 21 days to either settle their debt or reach an agreement on payment. If an agreement is not reached, then court action can be taken – giving the customer 14 days to respond - and the creditor can subsequently apply to have the customer’s business wound up.
However, if an owner is still focused on resolving the dispute without the potential for lengthy and costly legal action, then a mediation may be the best approach. In a mediation, an impartial, trained professional will oversee discussions between the two parties aimed at reaching an amicable resolution without the need for court action.